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My take on the Greek drama

You may already have read the piece below, taken from the “Accountancy Live” website, but it sets out some relevant observations which I hope you will read, and which please feel free to pass to others.

You ask for my take on it. I don’t have any unique insight, but, again, there are a number of key points. There is no painless solution to this fiasco, and the more that Greece receives by way of loans that it has no hope of repaying, the worse it all gets. These loans to Greece just add to the mountain of debt that plagues the entire Eurozone. These bad debts amount to a massive capital destruction and represent real losses that are going to have to be borne by the other members. The arguments about who bears which proportions have not yet even begun.

The Greek humiliation is a warning to other eurozone members

The Greek humiliation is a huge warning to other small Eurozone members. What was designed to bring Europeans closer is now held together by little other than fear. The Eurozone as a whole is an economic basket case and a democratic disgrace.

As for the “reforms” the creditors are seeking to impose on Greece, even if implemented they can only make matters worse, in the sense that they will make it more difficult to establish a thriving private sector, which is Greece’s only hope of salvation. The last thing economic recovery needs is higher taxes.

In essence, Greece must gradually re-establish self-reliance and self-belief, rather than dependency on outsiders. For this they need to recognise where the “hand-out” dependency culture has landed them. Their institutions have lost all integrity, without which they cannot operate. They are incapable of collecting the taxes they are owed without graft and corruption that obtrudes on every walk of public and private life. Unless they replace indolence with industry it will be impossible to re-establish a half-decent work ethic. The ethic that currently pervades the Greek workplace is reliance on hand-outs as an entitlement, followed by state-funded early retirement at 55. From this they need to be weaned – but that’s impossible unless they truly confront the alternative they have been led to by their crazy socialist political leaders.

Embracing free-market capitalism is their only hope of self-sufficiency

iEmbracing free-market capitalism is their only hope of self-sufficiency. They love the euro only because they love the protection that unlimited bailouts promise them. They don’t actually need the euro, and they don’t need a self-debasing drachma. Their best move would be to repeal all legal tender laws and permit traders to agree to settle their contractual trading obligations in ANY currency of choice, whether dollars, pounds, yuan, yen, euros, krone or gold. in this way they will rebuild private capital and private savings. Under free-market capitalism debt would never have been allowed to reach these unsustainable, stratospheric levels because it would have been sold to willing buyers who anticipated eventual repayment in currency of at least the same purchasing power as lent. Instead the debt was foisted on unwilling citizens of eurozone states.

It will unscramble and disintegrate, and there will be pain. But that is the nature of an overdue purgative.

Let’s talk about money. Imagine that the currency your government has adopted is one over which it has absolutely no control. Will it trust remote, unelected technocrats, who do control it, not to lend capriciously against worthless collateral? On projects that, even on a cursory evaluation, will never return a profit? Can unprincipled functionaries be trusted to preserve its purchasing power? For how long would you expect such a currency to survive?

As I write, the Greek tragedy now on stage is convulsed in political wrangling, with the no vote winning a referendum carrying existential implications. Since potential consequences are pure speculation, we can at least ask how this crisis became inevitable.

When the financial tsunami of 2008 struck, the Queen famously asked: ‘If this thing is so big, why did no-one see it coming?’ Well, in today’s case, many did see it coming and shouted warnings – but the closer it came, the greater became politicians’ propensity for deafness.

Greece’s creditors, the International Monetary Fund (IMF), European Commission and European Central Bank (ECB), tried to wring concessions that might have achieved yet another illusory bailout. I say ‘illusory’ because the ECB lifeline, ‘emergency liquidity assistance’ (ELA), is nothing but a conjuring trick.

Follow this: the ELA lends money to insolvent Greek banks via the Bank of Greece against collateral of freshly minted bonds. The banks pass this money to the government, which then uses most of it to pay interest on existing debt, as well as wages and pensions to public sector workers. As an exercise in financial futility, this charade takes some beating.

The Greek government was desperate for a few billion more euros from the IMF and ECB in order to pay its maturing debts to, yes, the IMF and ECB. Doesn’t it normally tell you something important about those who owe you money when you have to lend them more so that they can meet their next repayment?

Ninety per cent of Greece’s earlier bailout funds went straight to financial institutions rather than into its real economy – a huge dose of quantitative easing in effect. A third bailout would do the same: repay those lenders still more of the fiat-junk they generate on tap.

A deeper fault-line

Dependency, whether of individuals or nations, always descends into entitlement. There will always be one nation whose economy lags behind the others. An arrangement whereby taxpayers in 18 countries are obliged to subsidise the unconstrained profligacy of one laggard’s bloated state sector can become an alluring entitlement. No wonder the majority of Greeks still want to retain the euro, even after the music has stopped.

Just to add a further dose of misery to the mix. Much has been written about the risk of contagion. Well, here’s the real contagion: the ECB’s share of Greek debts, that will never be repaid, is double the ECB’s own equity and reserves. It is in dire straits and will soon have to make a cash-call from eurozone members, at least half-a-dozen of which teeter on the brink of bankruptcy themselves.

About the author

Emile Woolf FCA is director of Hyperion Insurance Group and former forensic accounting specialist www.emilewoolfwrites.co.uk

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